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The Basics of Delta in Options

Options price is affected by several factors including changes in the underlying asset price, time to expiration, market supply and demand, interest rates, economic and geopolitical events, and investor sentiment. The factors for which there is a quantitative change in price are called Greeks i.e. Delta, Gamma, Vega & Theta.

Today we will talk about Delta !!




What is Delta?

Delta is a key metric in options trading that measures the change in the price of an option relative to a change in the underlying asset. It represents the expected movement of an option's price for every one-point move in the underlying stock or asset.

How to read Delta ??

It is expressed as a decimal between -1 to 1. Here is how to interpret option delta:

Call Option Delta: A call option delta of 0.5 means that the option has a 50% chance of expiring in the money. A delta value greater than 0.5 indicates that the option is likely to increase in value if the underlying asset increases.

Put Option Delta: A put option delta of -0.5 means that the option has a 50% chance of expiring in the money. A delta value less than -0.5 indicates that the option is likely to increase in value if the underlying asset decreases in value.

What does a higher and lower Delta mean?

For Call Options, a delta value close to 1 means that the option is highly sensitive to movements in the underlying asset, and there is a high probability that the option will end up in the money. Conversely, a delta value close to 0 means that the option is not very sensitive to movements in the underlying asset, and there is a low probability that the option will end up in the money.

For Put Options, a delta value close to -1 means that the option is highly sensitive to movements in the underlying asset, and there is a high probability that the option will end up in the money. Conversely, a delta value close to 0 means that the option is not very sensitive to movements in the underlying asset, and there is a low probability that the option will end up in the money.

In general, options traders often prefer options with high delta values as they represent a higher probability of profit. However, this also means that options with high delta values are often more expensive than options with low delta values. It is important to consider the delta of an option along with other factors, such as the price of the underlying asset, volatility, and time to expiration, when making options trading decisions.

Option’s Price Calculation with Delta

Let's take a hypothetical Example.



For call options (CE), as the stock price rises, the option premium increases and its value goes up. On the other hand, as the stock price decreases, the option premium decreases and its value decreases as well.

OTM CE

Strike Price - 2460CE
Price = 15

Delta = 0.3

Spot price moves up from 2400 to 2410, which is 10 points

CE moves up by 10 x 0.3 = 3pts
2460CE = 15 + 3 = Rs.18

ATM CE

Strike Price - 2400CE
Price = Rs.40

Delta = 0.55

Spot price moves up by 10 pts

Then 2400CE will move up by 10 x 0.55 = 5.5pts
 2400CE value will be 40 + 5.5 = Rs.45.5

ITM CE

Strike Price - 2260CE
Price = 150

Delta = 0.94

Spot moves up from 2400 to 2410. For this 10pts move

2260CE will move by 10 x 0.94 = 9.4pts
So, 2260CE = 150+ 9.4 = Rs.159.4

Now in the case of put options (PE), buying a PE signifies a bearish market outlook. As the stock price decreases, the option premium increases, leading to a higher value. Conversely, as the stock price rises, the option premium decreases, resulting in a lower value.

OTM PE

Strike Price - 2340PE
Price = 12.7

Delta = - 0.21

Spot price goes down from CMP 2400 to 2390 = -10 pts

PE moves up by = -10 x - 0.21 = 2.1pts
2340PE price = 12.7 + 2.1 = 14.8

ATM PE

Strike Price - 2400PE
Price = 27

Delta = - 0.43

Fall in Spot = -10pts

Increase in PE = -10 x - 0.43 = 4.3
2400PE = 27 + 4.3 = 31.3

ITM PE

Strike Price - 2520PE
Price = 111.45

Delta = - 0.85

Spot moves = - 10pts

PE moves = - 10 x - 0.85 = 8.5pts
2520PE = 111.45 + 8.5 = 119.95

From the above examples, it should be clear which option will gain more premium and to what extent. The option's value is directly related to the change in the price of the underlying asset.

I hope you found this informative and learned something new.

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